Investors have become cautious since Russian troops entered Ukrainian-held Crimea. With the possibility of armed conflict involving at least one world power, some care seems prudent. While Russia's incursion has made the stock market uneasy, North American fertilizer producers like Potash Corporation (NYSE:POT), The Mosaic Company (NYSE:MOS), and Agrium (NYSE:AGU) may benefit from the situation, however. Here's why.
Strengthening ties could mend a broken cartel
Now that Russia has committed to holding a piece of the Ukraine, strengthening its relationship with other countries in the region will be necessary. Belarus is likely the most important of these.
Russia needs a friendly Belarus. Strong ties between the two countries would help solidify Russia's position with Ukraine, and would also help influence key Baltic Sea states like Lithuania and Latvia which border Belarus. Given its strategic location, it would not be surprising for Russia to take whatever steps necessary to make sure Belarus remains a staunch ally. What does that mean for North American fertilizer producers?
Strengthening ties between Russia and Belarus would likely increase the chance for the renewal of the Uralkali and Belaruskali potash-selling venture. Russia's Uralkali, a world-class producer, decided to dismantle its partnership with Belaruskali, Belarus' state-owned provider, last summer. The breakup pummeled shares of fertilizer companies and initiated a breakdown of fertilizer pricing worldwide.
A reconfiguration of the Uralkali-Belaruskali partnership would benefit the crop nutrient industry tremendously, hinting at a turnaround in a sector that has seen pricing pressures decimate operating results. While there have been some early signs of a possible reconciliation, it may be Russian strategic interests that make the deal happen.
Russian sanctions may help North American producers
North American crop nutrient producers could also benefit from Russian sanctions. Moscow's decision to move into Crimea did not sit well with the United States and its European allies. Western officials quickly imposed economic penalties against Russia with further sanctions promised if aggression in the region did not cease.
Crop nutrient sales are an international endeavor. Major buyers are located in diverse regions such as North America, China, India, Brazil, and Australia. Producers have found that marketing their product through selling partnerships is the most efficient way to reach these diverse customers. In potash, a main crop fertilizer, two major partnerships emerged accounting for most worldwide product sales. The Uralkali-Belaruskali venture and Canpotex, an international marketing company owned by North American producers.
Concerns about current and potential Russian sanctions might allow Canpotex to score market share gains. Uralkali's geographic proximity to China and India gave it a big advantage in that lucrative region, but these customers may now be looking toward the West for supplies with potentially escalating sanctions on Russia a possibility. In an extreme sanction situation, Canpotex may even end up being the world's preferred potash supplier. This would be an obvious boost for Western-based producers.
Which companies could benefit?
A renewal of the Uralkali-Belaruskali agreement or potential foreign sales gains due to Russian economic sanctions should improve Western fertilizer producer fortunes. Those that might benefit the most include:
Potash Corp is the world's largest integrated fertilizer company by capacity. Since the Uralkali partnership breakup, the company has faced difficult times. Operating income plunged a devastating 34% in its latest quarter as a product selling price drop of over 27% overshadowed sales volume growth of 34%.
Already taking steps to maintain profitability with staff and operational cutbacks, a more amenable pricing environment and better access to foreign markets would likely improve Potash Corp's results substantially. This could in turn help the company's stock trend back toward last year's $43 a share high.
The Mosaic Company
Mosaic might also benefit from Russia's foray. Mosaic, the world's largest phosphate crop nutrient producer, has also faced sector headwinds. Recent quarterly operating earnings fell over 60% year over year as pricing power deteriorated.
Mosaic is looking to boost profitability by focusing its business. The company closed a non-essential potash mine, exited under performing South American ventures, and canceled a planned plant in Louisiana. While also strengthening its phosphate's leadership position with a $1.4 billion purchase of assets from peer fertilizer producer CF Industries.
Given strong demand for the company's product, record phosphate sales volumes were achieved last quarter. A better product pricing environment could set the stage for a noticeable rise in Mosaic's net income and its share price.
Agrium may also be a beneficiary. While the company receives 76% of its profits from a relatively stable retail business that sells crop nutrient and protection products to growers across the Americas and Australia, it also operates in the more volatile wholesale fertilizer production arena.
Thanks to its production exposure, the company did not escape last year's industry turmoil. Total gross profits fell a disappointing 24% year-over-year in the latest quarter. This was mainly due to pricing pressures in the wholesale business dropping that division's sales 24% and collapsing gross profits over 60%.
A relatively small producer, Agrium's leveraged position makes it prone to suffering mightily during fertilizer industry downturns. It may also allow it outsized gains during better times, though. Steadied by its retail business, any improvement in crop nutrient pricing or product demand should accrue meaningfully to Agrium's bottom line.
Russia's encroachment into Ukraine has unsettled stock markets but may end up helping North American fertilizer producers. It is hard to see how the sector wouldn't benefit from the renewal of a key Russian-based selling partnership or increased foreign market access for Western producers. The odds of both happening were greatly increased by Moscow's aggressive move. After disappointing investors for nearly a year, North American fertilizer producer shares could be primed for a rise on any news that suggests an improved operating environment.